IAP Defined

IAP Defined provides you with a text/pictorial step-by-steppresentation of IAP. This should make your job easier in understanding and implementing IAP as it relates to eSap.

IAP Defined

IAP allows you to compare a company’sfinancial performance with its peers

Read chapter 9 in the book Understanding eSap

IAP Defined

Before we describe how to use IAP, we should first develop a better understanding of how companies operate within certain industries and how industries operate within certain sectors

Sectors

IAP Defined

Companies operating withinthe same industries behave similarto one another. Industries operating within the samesector also behave similar to one another

Industries

Let’s take a look at the different sectors individually and list their particular characteristics which link one industry with the other within each sector.

1) Consumer Discretionary 6) Industrials2) Consumer Staple 7) Info-tech3) Energy 8) Materials4) Financials 9) Telecom5) Healthcare 10) Utilities

For example, let’s begin with the Consumer Discretionary sector. Following are some characteristics which link one industry to the otherswithin that particular sector. Below are examples of companies whichoperate within the Consumer Discretionary sector.

• Incorporates the largest number of corporations• Growth dependant upon a positive economy• Products/services designed to satisfy desires and not needs• Increasingly reliant upon computer technology• A slowing economy results in shrinking revenues and margins

Let’s now look at the Consumer Staples sector with a samplingof companies operating within this sector.

• Products/services designed to satisfy needs and not desires• Not as dependent upon economic state• Is a more predictable sector for investors• Negatively impacted by slowing economy, but not to the extent as the Consumer Discretionary sector• Products have a short shelf life• Heavily dependent upon commodities

The next sector we will look at is the Energy sector, primarilycontaining the Oil & Gas industry.

• Very seasonal, with drilling and product demand highest during winter time• Price levels have significant effect on the global economy• Generally non-unionized due to above average wages and salaries provided by higher margins• Cyclical in nature• Strong economy usually results in strong activity and margins

Let’s now go on to the financial sector.

• Highly integrated and therefore highly competitive• Invest clients’ money to generate sales and profits instead of capital• Generates one of the largest margins of all sectors• Strong correlation between participants and stock market performance• Increasing interest rates usually slows down the economy which negatively impacts upon sector performance• Growing economy overtime can result in lax credit standards, resulting in saving’s and loans malaise of the 80’s and sub prime mortgage malaise of the 21st century

Next we’ll look at the Healthcare sector.

• Potential is highest due to global aging population• Not affected by economic state due to demographics• Highly volatile due to length of time required to develop a product for market• Very dependant upon government policy• Once products brought to market, margins usually very high• Large research and development (R&D) component required• Short term future not as promising due to imminent expiration of patent protection

Now a quick look at the Industrial sector.

• Requires considerable capital equity investment to operate business• Margins usually slim• Dependent upon a growing global economy

Going on, we’ll now discuss the Info Tech sector.

• Very volatile• Dependent upon a growing economy• Characterized by Moore’s law: technology speed doubles every 18 months while costs are cut in 1/2 over some period (short life span what Greenspan calls “creative destruction”• Growth usually secure due to need of businesses to update technology• Large R&D cost required to maintain growth rates

Now for a peek at the Materials sector.

• Heavily dependent upon commodities• Sector usually improves as global economy struggles (“flight to safety”)• Often partnerships develop between explorers & drillers & miners• Requires investment of considerable capital equity• Margins usually lean• Very dependent upon global government cooperation• Performance of participants can vary within same sector but different industries

Let’s talk a bit about the Telecommunications sector.• Global catastrophes (9/11) has made this sector an essential safe keeping sector (ex. Cell phone provide security)• Large R&D component• Short shelf life of products• Lots of integration• Dependent upon economic state• Dependent upon government policy (ex. Bidding on wave bonds)• No global tech standard in place to ease volatility• Margins usually challenged due to competitive nature

Last but not least, a brief discussion on the Utilities sector.

• Characterized by consistent dividend payouts• High government control thereby reducing volatility• Margins usually slim• Large investment in capital equipment• Costly infrastructure maintenance programs• Seasonal• Not as dependent upon economic state• Large R&D component

IAP Defined

First, click on the Wall Street Journal websitewww.wsj.com

We will now move into the meat and potatoes of IAP. We willuse Walmart (WMT) as our study company.

IAP Defined

Lay cursor on “Markets Data & Tools”

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Click Company Research

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Type in Wal-Mart’s stock symbol WMT and click the green arrow

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Scroll down the page and click the industry “Broadline Retailers”

IAP Defined

Scroll down and click “Show All Stocks in this Industry”

IAP Defined

Click “5 Years”. You now have a list of all of Walmart’s peersoperating within the Broadline Retailers industry.

IAP Defined

Click on BJ Wholesales Club Stock symbol as one potential Walmartpeer. Remember IAP requires you to choose 5 peers who have generateda profit.

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Click “Company Website”

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Click “Financial Information”

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Click SEC Filings since BJ does not provide annual report coverage,which is my preference.

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Click “Annuals”

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Click Fiscal 2005 PDF Format (Red) since this is the most currentfinancial reporting annual period.

IAP Defined

BJ made a profit from its operations and therefore qualifies as Wal-Mart’s peer.

IAP Defined

Now move to the IAP software and start by entering the nameBJ Wholesale Club Inc. in the C1 cell.

IAP Defined

From your readings within the 2005 SEC filing, you will find BJ’sstock symbol to be bj.

IAP Defined

Also from your readings you will find that BJ trades on the NYSE.

IAP Defined

Within Part B of IAP under Item 1 (Income Statement), input all valuesrequested from BJ’s 2005 Income Statement.

Refer to Pg 28 of BJ’s 05 Income Statement

IAP Defined

Within Item 2 (Balance Sheet) of IAP, input all values requested fromBJ’s 2005 Balance Sheet.

Refer to pg 30 of BJ’s 2005 Balance Sheet

IAP Defined

Combine Net Profit with Depreciation/Amortization value to arrive at total cashflow from BJ’s 2005 Cashflow Statement.

Refer to pg 31 of BJ’s 2005 Cash Flow Statement

IAP Defined

IAP automatically calculates for you the 2 ratio’s expressed in %

IAP Defined

Calculate EBITDA by dividing Total Net Revenue into (Net Profit + Interest Cost + Income Taxes + Depreciation + Amortization).

Refer to pg 28 & 31 of BJ’s 2005 Income Statement and Cash Flow Statement

IAP Defined

Calculate EBIT by dividing Total Net Revenue into (Net Profit + Interest Cost + Income Taxes).

Refer to pg 28 of BJ’s 2005 Income Statement

IAP Defined

IAP automatically calculates for you Net Margin, ROE, ROA and ROE/ROA.

IAP Defined

IAP automatically calculates for you all items listed under Item 5entitled Asset Performance.

IAP Defined

IAP automatically calculates for you all items listed under Item 6 entitled Debt Management.

IAP Defined

IAP automatically calculates for you all items listed under Item 7entitled Liquidity.

IAP Defined

Go back to the full listing of Walmart’s peers found on WSJ.com and isolate 4 more peers, following the same procedure you used for enteringBJ Wholesale data.

IAP Defined

Once you have inputted all the data for the 5 Wal-Mart peers, IAP automatically calculates the peer averages and transfers these averages back to the eSap software under column IA(%).

IAP Defined

You have now completed your financial analysis of Wal-Mart's 5 peers using the IAP software. The peer results will help you compareWal-Mart's financial performance to its peers. For further reading, referto chapter 9 of the book Understanding eSap.

IAP Defined

I wish to thank the following companies for their input into IAPDefined: B.J. Wholesale and Wal-Mart.